2023-06-02 10:05:12 ET
Summary
- Corteva is well-positioned to capitalize on the growing demand for food supplies and maintain steady growth with its agricultural chemical and seed products.
- The company faces risks such as commodity price fluctuations, supply chain disruptions, and intense competition in the industry.
- Despite some financial concerns, Corteva remains financially stable and offers value through growth, a dividend yield of 1.09%, and a solid share buyback history.
Investment Summary
Corteva Inc ( CTVA ) is a renowned global agricultural chemical and seed company, known for its consistent financial performance and promising growth opportunities. As the demand for reliable food supplies continues to rise, Corteva is well-positioned to capitalize on this trend and maintain steady growth. The company's innovative products play a vital role in addressing this growing need for food production.
Area Shortage (Investor Presentation)
The company had a strong start to the year, with perhaps not parabolic growth but still a 6% YoY increase in sales does help bolster the outlook for both the company and the industry it’s in. Currently, the company is trading under the level when I released my first article about Corteva, but I am still bullish about the outlook for it and will maintain my buy rating. Paying 18x forward earnings for a company with solid margins, a history of buybacks, and also a decent dividend yield seems realistic.
Positive Market Outlook And Demand
The fertilizer market is experiencing significant tailwinds driven by the increasing demand for food caused by a growing global population . This surge in demand for crops has created a corresponding need for fertilizers. Moreover, the shift towards sustainable and organic agricultural practices has further fueled the demand for organic fertilizers derived from natural sources.
Global Demand (Investor Presentation)
The fertilizer market is closely intertwined with the seed and crop protection markets, as all three sectors contribute to the growth and vitality of crops. Both conventional and genetically modified seeds are projected to witness steady growth, driven by factors such as population growth and the quest for reliable food sources. Additionally, the conflict in Ukraine has created a void in the global market, leading to a sharp decline in grain and corn supply. This has intensified the demand for fertilizers, as new areas must be cultivated promptly to compensate for the decreased supply.
Market Postion (Investor Presentation)
In summary, the fertilizer market is propelled by factors like population growth, the need for food security, and the aftermath of geopolitical events. This creates opportunities for sustained growth and development in the agricultural industry. A place that Corteva can help fill with their products. With an already establishes position in the market they are more able than any to benefit from this demand and growth.
Risks
Corteva faces certain risks associated with commodity prices and potential disruptions in the supply chain. Fluctuations in the costs of essential raw materials used in its product manufacturing have the potential to affect the company's profit margins and overall financial performance.
Additionally, operating in a fiercely competitive industry poses challenges for Corteva. With established competitors and new players entering the market, the company must navigate intense competition. This competitive landscape may exert pressure on pricing and potentially impact Corteva's market share.
Market Revenue (Investor Presentation)
Where I perhaps might see a slight risk is the Latin American market. it was highlighted in the last report by the company, where the net sales decreased by 20% for the seed segment of the company. Fortunately, the remaining markets they are in helping the segment grow at 7% YoY at least. Some of the notes by the company here is that Latin America seemed to have constraints in corn supply. Going forward I think this will be key to watch out for. I think seasonality issues like this are to be more and more expected as climate change is taking its effect on the industry.
Financials
Moving over to the financials of the company they have seen a quite drastic decline in the cash position, going from over $3 billion in Q4 of 2022 to under $1.7 billion in the last report. Nonetheless, the current assets have increased substantially primarily driven by an increase in the receivables. Driven by increased demand and a steady demand for fertilizers across the several markets the company operates in. I think this gives proof of the spark that still exists in this industry and even though last year's run-up was great for a company like CTVA, the trajectory is still upwards.
Where I see some worry here is the current liabilities creeping up slowly to the same as the current assets. The company has close to $4 billion in short-term borrowings which the cash position is of course not able to handle. The increase is drastic as in Q4 2022 it was close to 0 instead. But with $1.2 - $1.4 billion in FCF estimated for 2023 paired with the cash they seem to be able to manage this anyways. Looking at the long-term debts instead, they sit far lower at $1.2 billion right now. 2023 will be an interesting year in terms of the development of not just the business and sales, but the balance sheet especially.
The company has a solid net debt/EBITDA ratio of under 1 right now and EBITDA is estimated to increase by 13% at the midpoint in 2023 compared to 2022, I am confident they will be able to navigate their financials efficiently. Going into the remaining reports for the year, I don't expect to see a strong increase in the cash position, but instead, a hopeful decrease in the short-term liabilities instead. All in all, I think Corteva remains financially stable and don't see enough of a reason here that would deter investment in the company.
Valuation & Wrap Up
I believe Corteva is an excellent option to gain exposure to the fertilizer market. The company holds a strong position here and can offer value not just through growth in the company, but also with a dividend yield of 1.09% and a solid share buyback history. Looking at similar companies in the sector, one that comes to mind is The Mosaic Company (MOS). Where I see the benefit of owning CTVA instead of MOS is the superior growth trajectory they have. Earnings for CTVA are expected to grow around 10% CAGR the next 5 years, while MOS is expected to see a nearly 30% decline in EPS instead. With this earnings trajectory for CTVA I think they come out ahead compared to MOS.
Despite MOS having FWD p/e of just 6, the lack of future earnings growth likely helps with keeping the company at this low multiple. Moving over to margins, MOS does have a solid bottom line with a net margin of 15%. MOS hasn't used these strong margins to help build up a solid balance sheet, instead it seems much of the capital has gone to buybacks and dividends instead. CTVA has so far been able to maintain a very strong cash position compared to the debt, something I don't see with MOS, and that does bring risk into the calculation, a factor I think leads to the company trading at the low multiple it does. For instance, CTVA has 1.3 as much cash at hand as long-term debt, while MOS has 5x as much long-term debt as cash currently.
Stock Chart (Stock Chart (Seeking Alpha))
The market is ripe to continue growing as the necessity to establish strong and reliable food supply routes will be key. Corteva can help with this immensely. Corteva is continuing to acquire companies to help grow their business which has resulted in an EPS guidance of $2.8 - $3 for 2023, putting the company at a forward p/e of about 18. This is a valuation I am happy to pay and will be rating Corteva a buy, and it's not far above the historical average either. The sector's average p/e seems to be around 12 - 14 on a forward basis. Why I see a buy for CTVA even at a higher multiple then this is the solid growth I see the company having, which I think is worth paying the premium for. Apart from that, it's a well-run company that has a stable dividend and a balance sheet that looks great. That sort of stability is worth paying a little bit extra for in my opinion.
For further details see:
Corteva: Solid Quarter To Start The Year